CU power plant: $21 million cleaner than it needs to be

Coal remained piled outside James River Power Station in early December. City Utilities decided to stop burning coal at the plant in October, less than a month after completing a $20.7 million upgrade. The excess coal will be shipped to the John Twitty Energy Center.(Photo: Andrew Jansen/News-Leader)Buy Photo

In late September, City Utilities conducted final tests on $20.7 million of new emissions equipment at James River Power Station. The upgrades, which included baghouses to capture mercury and other pollutants, would allow two of the station's five generators to meet new federal standards for burning coal.

Less than a month later, CU announced it would stop burning coal at James River after all. Coal still on the ground at the plant will be shipped to John Twitty Energy Center for use in the two generators there.

Officials say the cost of complying with additional coal regulations at James River has become prohibitive, despite the multimillion dollar investment. Going forward, the plant is expected to be run only a few months a year, using natural gas.

Steve Stodden, CU's associate director for electric supply, said the recent emissions improvements could provide a marginal benefit, but natural gas burns cleanly enough already that they would not have been required to meet emissions standards.

The baghouses, now effectively obsolete, were among the several reasons CU cited for a series of electric rate increases City Council approved in 2013. The rate hikes, spread out over three years, were expected to increase a typical residential customer's bill by about $13 a month by the end of 2016.

During council hearings on the proposed rate changes, members of the Sierra Club were critical of the plan to upgrade the older units at James River to continue burning coal, saying CU should have given more consideration to alternative energy sources.

CU in recent months has done just that. Thursday, officials announced a contract with a new Oklahoma wind farm large enough to supply about 25 percent of CU's electricity needs, at a lower price than can be produced locally.

But they also have defended the upgrades to the James River plant, which were recommended by Kansas City-based consulting firm Burns & McDonnell.

Stodden said the emissions improvements, approved in August 2012 and put out for bid soon after, made financial sense at the time. But many of the projections on which the decision was based have proved inaccurate — Burns & McDonnell's forecasts underestimated how restrictive new environmental mandates would be, he said, while overestimating the cost of a switch to natural gas, which has become markedly less expensive in recent years.

“You spend $21 million and kind of question the benefit you’re getting from that," Stodden said. “Hindsight’s wonderful, but you have to make commitments about how to comply with those environmental regulations in a very dynamic time in the industry."

Predicting the future, and failing

Whether the older, less efficient units at James River Power Station could continue burning coal already was a question in 2011, when CU commissioned Burns & McDonnell to come up with a 10-year plan for complying with heightened environmental standards. The mercury emission limits that took effect this year had been announced, and while the newly built second unit at John Twitty Energy Center was expected to be in compliance, JTEC-1 and all five generators at James River would fall short.

After analyzing various options, Burns & McDonnell recommended that CU switch to using natural gas exclusively in the three oldest units at James River, while investing in the upgrades needed to continue burning coal in the two newer units there, as well as JTEC-1.

The recommendation, Stodden said, was based in part on an expectation that natural gas would steadily rise in price.

“If gas was at $4 (a dekatherm) and above, those coal-fired generators made more sense,” Stodden said.

A chart, provided by City Utilities, shows how projected natural gas costs have changed in the past four years.(Photo: Submitted by City Utilities)

Natural gas bottomed out at around $2 a dekatherm in April 2012 as supply flooded the market. Prices began rising steadily soon after, however, and as late as November 2014, forecasts from CU's consultants called for gas prices to remain above the break-even point.

But the so-called shale gas revolution has continued. Prices tumbled again in January, hitting a low near $2 again in October. Current expectations are that natural gas will remain below $3.50 a dekatherm through at least 2020.

A tipping point

Environmental regulations also have turned out to be more restrictive than anticipated in 2012, Stodden said.

New standards for storing coal ash, which the EPA had circulated in draft form in 2010, were unveiled at the end of 2014. The rules were published in final form in April, with some provisions taking effect in October.

The coal ash rules would have created additional cost at James River, Stodden said, but were not an insurmountable obstacle.

“There were options for working with that," he said. "It wasn’t going to be easy but we could do it.”

Stodden said new regulations on power plant wastewater, published Sept. 30, eliminated those options.

“What the rule actually came out to be was worse than the worst case" projected by Burns & McDonnell, he said.

Stodden said the wastewater rule effectively prohibits CU from discharging any water from its power plants — anything contaminated by coal ash has to be stored, treated or recycled on site.

At JTEC, water that is used to flush coal ash will be recirculated in a closed system that helps cool the plant. The same plan won't work at James River Power Station.

“James River is right by the river … so it’s more problematic," he said. “It would have been prohibitive to keep putting money into that site.”

Stodden said there were discussions about calling off the upgrades at James River in early 2015, as natural gas prices fell and the expected cost of environmental compliance rose. But a significant portion of the $20.7 million total — engineering and some materials — already had been incurred.

“The cost to cancel those contracts is so high, because so much of the work is on the front end," he said. Rather than be left with nothing to show for the expense, CU opted to complete the baghouses, even if they would supply only minor benefits. “We said, at this point we’re probably better off going through with the project.”

Calculating costs

Whether or not they agree with the decision, CU customers will pay the bill. But Ray Ross, CU's director of pricing and forecasting, said other cost reductions are likely to overshadow the $20.7 million expense.

“Now, that’s a whole lot of money,” Ross said. But the cost of the upgrades, paid back over 30 years, comes to about $700,000 annually, which he said is about 0.3 percent of CU's annual budget for electric production.

Ross said reduced personnel and maintenance costs at James River will save more than that. (Similar savings, it should be noted, would have been possible if the utility had made the switch to natural gas earlier).

Stodden said the James River plant required a staff of about 95 when it was regularly burning coal. With the conversion to natural gas (and operation only during periods of high demand), CU expects as few as 20 to 25 workers will be needed.

Stodden said there are no plans to lay off employees, and noted the staff already is down to about 55. Further reductions will come through attrition, he said, with excess staff members assigned to other duties at the utility that otherwise would have required hiring contractors.

“We won’t hire folks in power generation for the foreseeable future,” Stodden said. “We haven’t for several years already.”

CU also is applying for change to its air permit at James River. By lowering the emissions permitted at the plant — not a problem with the switch to natural gas — CU can avoid annual testing and maintenance costs of about $500,000 a year, Stodden said. Another $300,000 to $400,000 will be saved from fuel that would have been burned during required tune-ups.

Ross said that, altogether, electric fuel costs are the lowest they have been in about five years and the outlook is "optimistic" in the near future.

CU, which five years ago expected to be selling energy into the transmission market, is now buying much of its power at lower prices than could be generated here, in large part because of the shift toward natural gas.

“It’s great for our customers,” who benefit from cheaper natural gas and cheaper electricity, Stodden said. “But it makes it really hard to do planning where you see that much rate change in a short time period.”